We have entered a digital world where money is transferred in an electronic medium. That is a big step up from the early stages of civilizations that used the barter system.

One such form of currency that is the newest introduction to the financial world is cryptocurrency. It has been more than a decade since the world’s first cryptocurrency got introduced and has existed since, yet it is an enigma to many!! 

You must have come across terms like Bitcoin, Ethereum, etc, which are some of the first cryptocurrencies introduced. After reading this article, you will understand the language of “Crypto Gurus” or the pro-crypto traders. 

Also Check : Cryptocurrency Trading

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Reasons for the creation of  cryptocurrency

There has always been an argument about the way finance in today’s world works, where governments around the world and major centralized banks play a discretionary role. Hence the control of the flow of monetary assets or currencies is restricted as per rules and regulations set by these authorities.

Major misuse of this authority of power was observed in the infamous 2008 Financial crisis, which is argued to be a byproduct of bad loans and malpractices of major banks in loan disbursements. But as the crisis deepened, the public tax-payer money was used to bail out the big banks so that they are kept afloat!!

Looking at such scenarios, creators and developers came up with the idea of cryptocurrency to make it the money of the common people, to empower them how to administer it democratically- or Decentralized, unlike the fiat currency which is at the discretion of the government and central banks. 

What is Cryptocurrency??

Cryptocurrency is a digital currency that uses cryptography and secures digital ledgers to avoid duplication or fraud. It has no physical form as fiat currency or other assets. 

It is decentralized, accessible to anybody and everybody on their electronic devices with internet connectivity throughout the world on a peer-to-peer basis. And hence can be used for the purchase of products or services.

Cryptocurrencies are the counterparts of normal currencies but are not in the form of notes. These cannot be touched but can be transacted like text messages or emails electronically only. Their values are not determined by central authorities like banks, governments, or financial institutions. These are administered by their users worldwide. Hence decentralized.

How does Cryptocurrency work?

Cryptocurrency, since it is digital or software data, needs a digital mode of transaction which is called Blockchain. Since this is open-source and a public ledger, any user can access the transactions for verification. This system also eliminates the need for third-party verification, hence eliminating the trust-based transactions that currency banking systems follow. 

While anyone can view and access the ledger, the identities of individuals are encrypted by unique sets of keys called the public key and private key. 

In particular, Private Key is the secret key used to encrypt and decrypt messages between communicators. It’s a form of symmetric encryption. On the other hand, Public Key functions are based on asymmetric encryption. These unique sets of keys are the digital identities of an individual’s account and the cryptocurrency in the account. 

Transactions made between peers are encrypted and then are broadcasted to the cryptocurrency network and queued up to be added to the public ledger. Transactions are then recorded on the public ledger through a process called “Mining”.

Characteristics of Cryptocurrencies

Since you now have a good understanding of the basics of cryptocurrency, Let me give you an insight into the characteristics and advantages of Cryptocurrency over fiat currency.

Decentralized

As mentioned, the cryptocurrencies in the markets are not administered by any central authority but are distributed among all peers worldwide. Hence eliminating the intricacies of transactions in the current financial system like trust-based transactions via banks. With the implementation of blockchain, cryptocurrencies are being transacted on a peer-to-peer basis, eliminating third-party interference.

Ease

Blockchain also allows the digital assets to be transacted with much ease as there is less paperwork and wait time for transaction confirmations. Since most of the processes are automated, there are very few issues related to human errors. 

Economical

Since the fiat currency was centralized and there was no other option other than using banks or financial companies like PayPal, which charge a hefty percentage on transactions. That issue has also been successfully addressed by charging nominal transaction fees. 

Secure

No matter how secure the banks claim their systems would be since human interference is necessary for verification processes, there are always risks of fraud and insecure transactions. But Cryptocurrencies offer multilayer crypto-algorithms and the security of the whole system can be said to be intact until and unless the fraudster controls the maximum of the digital asset’s network. Most importantly, there is a minimal involvement of humans, which eliminates the factor of human error.

Anonymity

It is a great cause of concern, as to how much information is demanded by financial institutions for executing transactions. Your banking details or important identities may be stolen and misused. But using cryptocurrency offers a feature to keep your identity anonymous which is valued by many.

Accepted Worldwide

Cryptocurrencies do not have any border limits, the users can send and receive payments anywhere and anytime.

History of Cryptocurrencies

You now have a basic understanding of the term “Cryptocurrency”. Eager to know the history behind this popular invention???

 Back in the early 1980s, attempts were made to create digital currencies but they utterly failed due to fraud and lack of trust. In 1983 American cryptographer David Chaum invented anonymous cryptographic electronic money called e-cash. Later in 1995, David Chaum executed via a digital cash framework, which allowed the virtual currency or digital currency to be untraceable by the issuing bank, government, or any other third party.

 In the year 1996, the National Security Agency (NSA) published a paper entitled ‘how to make a mint’: the cryptography of anonymous electronic cash, describing it as a cryptocurrency system.

 In 2008 the world witnessed a severe financial crisis- businesses failed, banks faltered, a lot of people were in financial predicaments, unable to pay off loans, and even run daily errands. Many banks defaulted and declared bankruptcy.

 This made developers think of a way of transacting assets of monetary value without any dependencies on banks. In 2009, Satoshi Nakamoto released a document on open source software on blockchain technology, this is how cryptocurrencies came into existence.

Further, the first bitcoin transaction is said to be done by Satoshi Nakamoto (a group of people or a person) in 2009. Moreover, the history of cryptocurrency is not too long but it is an interesting and eventful history.

Different Types of cryptocurrencies

There are different types of cryptocurrencies in the market based on their functionality. However, they are all brought together by the ledger technology, Blockchain. The different types of cryptocurrencies are listed below: 

Payment Currencies

Payment currencies, as the name suggests, are currencies primarily used to pay for the purchase of goods and services. These are similar to fiat currencies which are accepted in exchange for a pack of biscuit or a pizza. 

Examples some of the payment currencies are Bitcoin (BTC), Litecoin (LTC) and Bitcoin Cash (BCH ).

Defi Tokens

Blockchain has not only made cryptocurrency payments easier but also paved a way for the creation of a parallel ecosystem of Decentralized apps(Dapps). 

These ecosystems enable users to create platform-specific digital tokens which are termed Platform tokens. Platform tokens are used to avail or run services and functions offered by various Dapps.

Platforms such as Ethereum(ETH), Ethereum Classic(ETC), NEO(NEO) are Blockchain ecosystems. The tokens used on these platforms are termed Platform Tokens.

Privacy coins

Privacy coins are designed especially to maintain the privacy of the transactions carried out. Only the sender and the receiver know the number of coins/digital assets transferred. Privacy coin wallet addresses are also as private as the coins.

Altcoins

Altcoins, short of Alternate coins, are all cryptocurrencies other than Bitcoin. There are more than 7000 cryptocurrencies listed on various platforms.

Stable coins

The coins are assets which are pegged/attached to fiat currencies such as the USD to maintain stability. Since cryptos are very volatile, people who want a long term investment or traders who want to safeguard their digital assets use this.

Non-Fungible Tokens

These are tokens that are designed specifically to hold a unique value of the subject. They are to be used for specific use-case scenarios. Let us consider that an NFT is created specifically as a ticket to a private concert. That NFT can only be used to enter the concert and nothing else.

Cryptocurrency Mining

This is a method of verifying the transactions to gain rewards, using significant computing power. Note that you have to have significant access to electricity and should be able to maintain your computing equipment called “Mining Rigs”.

You don’t have to do any calculations or math manually. All you have to do is have a capable electronic device and install the application which the creators prefer. The CPU or GPU in your device will do those calculations for you. It may be mandatory in some cases to keep the electronic devices connected to the internet. 

Trading Cryptocurrencies on exchange Platforms

One can buy or sell the cryptocurrencies according to their market value at a given time and enough market liquidity.  It’s like trading on the share market but instead, it’s a 24*7 process. 

You do not receive any physical assets but only receive the addresses of the digital assets that you have purchased, which can be stored in your crypto wallets. There are dedicated platforms such as Binance, Coinbase, Pionex, etc for the same purpose. But do check for transaction fees before you trade on any of these platforms.

Where to buy Cryptocurrencies?

Cryptocurrencies can be bought from the exchanges which are dedicated to crypto trading. Similar to the stock exchanges, the cryptocurrencies are listed on these exchanges from where an individual needs to register and purchase.

There are mainly two types of exchanges, Centralized and Decentralized

Centralized: The Concentration Of Control Of An Activity Or Organization Under A Single Authority.

A centralized exchange has an individual entity that decides on the aspects of the features of the currency. The future of the centralized cryptocurrency coin depends upon the organization.

Decentralized: The Movement Of Departments Of A Large Organization Away From A Single Administrative Centre To Other Locations. 

Decentralized Exchange is administered by its users on distributed ledger technology. Typically, a blockchain, that serves as a public financial transaction database.

How to safeguard & store cryptocurrencies?

Just like we use wallets for safeguarding fiat currency, there are tools called cryptocurrency wallets which are specifically designed to store your public key – The key which is like an address to your account, and a Private key- Sensitive key which is the password to access your wallet.

Anybody who has access to your private key can write in a public ledger by effectively spending the associated cryptocurrency.

Final Thoughts

I have covered all the important aspects one might need to know to venture into the world of cryptocurrencies. It goes unsaid that these cryptocurrencies are known to be volatile. 

That being said, it is also true that early investors in Cryptocurrencies like Bitcoin and Ethereum are now millionaires. It’s to be seen how the cryptocurrencies will evolve. It also offers privacy to its users, which is valued by many.

Hence it’s advised to do your market research at times and always be updated with the market trends.